Introduction
This is the fifth in a series of posts about “treaty based” foreign tax credits. Previous posts have discussed how the Bruyea and Christensen cases resulted in court rulings that U.S. tax treaties can create a foreign tax credit that is separate from and independent from tax credits allowed under the Internal Revenue Code. Of course, this depends on the terms of the treaty.
The facts as described in the Bruyea breif – filed September 2, 2025
STATEMENT OF THE ISSUES
Whether the Court of Federal Claims correctly determined that the income tax treaty between the United States and Canada (the “Canada Treaty”)1 allows a U.S. citizen resident in Canada to claim a treaty-based foreign tax credit against the net investment income tax (the “NIIT”) imposed by Section 1411 of the Internal Revenue Code of 1986 (26 U.S.C. — the “Code”).
SUMMARY OF ARGUMENT
For over 80 years, Canada and the United States have had income tax treaties in place, with the primary goal of preventing double taxation of the same income. Article XXIV of the Canada Treaty, entitled “Elimination from Double Taxation,” advances this purpose by providing that certain taxes imposed by each country are eligible for a foreign tax credit — a “treaty-based foreign tax credit” — even if otherwise not permitted under the internal laws of either country.
In 2010, Congress enacted the net investment income tax, the NIIT, which imposes a 3.8 percent tax on certain investment income generated by U.S. citizens (including those living abroad) and U.S. residents. Code Sec. 1411. For the 2015 tax year at issue, the Appellee, Paul Bruyea (the “Taxpayer”) was subject both to (1) Canadian taxation by virtue of his Canadian tax residency and (2) U.S. taxation by virtue of his U.S. citizenship. In that year, he sold real property located in Canada and paid more Canadian federal and provincial income taxes on that real estate gain than what he would have owed in total U.S. income tax and NIIT. As the Code does not provide a foreign tax credit — a “Code-based foreign tax credit” — against the NIIT, the IRS collected the NIIT on that same investment income on which he paid tax to Canada, resulting in double taxation. Here, the Taxpayer claims entitlement to a treaty-based foreign tax credit under Article XXIV of the Canada Treaty to offset the NIIT.
Framing the issue in the Bruyea case in simple terms:
The argument for allowing the credit: Bruyue argues that one would reasonably interpret the Canada/US tax treaty to allow a U.S. resident or citizen a foreign tax credit in the amount of the Canadian tax paid on that same income taxable, received at that same time, under the Internal Revenue Code.
The argument for denying the credit: U.S. Treasury argues that credit for the Canadian taxes paid on the income taxed by the United States is allowable ONLY to the extent that U.S. internal law (Internal Revenue Code) allows the credit.